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LEGISLATIVE  REFERENCE  DEPARTMENT 

COMPARATIVE  LEGISLATION  BULLETIN 

No  6 


TRUST  COMPANY  RESERVES 


MARGARET  A.  SCHAFFNER 


MADISON  WISCONSIN 
MAY  1906 


INTRODUCTION 

In  the  light  of  the  recent  agitation  in  New  York 
over  trust  company  reserves,  and  of  the  doubts  ex- 
pressed as  to  the  meaning  of  the  Wisconsin  trust  com- 
pany law,  this  bulletin  containing  a  summary  of  all 
the  laws  relating  to  trust  company  reserves  will  be 
found  suggestive  and  useful  to  business  men  and  leg- 
islators. 

CHARLES  Mc(  'AUTJIY. 
Legislative 


TRUST  COMPANY  RESERVES 


MARGARET  A.  SCHAFFNER 


COMPARATIVE   LEGISLATION    BULLETIN  — No  6  —MAY  1906 
Prepared  with  the  co-operation  of  the  Political  Science  De- 
partment of  the  University  of  Wisconsin 


WISCONSIN    FREE   LIBRARY   COMMISSION 

LEGISLATIVE  REFERENCE  DEP'T 

MADISON  Wis 

1906 


CONTENTS. 


Page. 
REFERENCES  ....................................................         3 

KINDS  OF  DEPOSITS  ...............................................         5 


DEPOSITS  .............  .........  ;  ..............  S 

GENEEAL  BANKING  DEPOSITS  ..............................  6 

Pemaiid  deposits  ..............  .........................  6 

Time  deposits  .............................................  7 

Aggregate  deposits    ...  .........................................  8 

Ratio  of  reserve  to  deposits     ..............................  8 

WHAT  CONSTITUTES  BANKING  ..................................  8 

REGULATIONS  ......................   ................................  10 

F  reign  countries    ...............................................  10 

United  States  ...................................  ........   ...  11 

MAINTENANCE  OF  THE  RESERVE  ............................  21 

PROVISIONS  REQUIRING  MAINTENANCE  OF  RESERVE  ...........  21 

Statut-.  ry  lequirement*   ....................................  21 

1  egulations  of  state  departments   ..........................  21 

Limitations  in  charters  ..................................  22 

PENALTIES  FOR  IMPAIRMENT  ...................................  22 

|J  Suspension  of  loans    nd  discounts  ...........    .'  .............  22 

Prohibit  ion  of  dividends  .....................................  23 

Tax  on  impairment  of  leserves  ..............................  23 

Declaration  of  insolvency  .......................  24 


REFERENCES 

•O 


AMERICAN  BANKERS'  ASSOCIATION.  Trust  company  section. 
Report  of  proceedings  of  the  8th  annual  convention. 
New  York,  Sept.  13,  1904.  Bankers'  magazine,  Oct. 
1904,  vol.  69,  p.  562-624. 

Contains  addresses  by  bankers  and  trust  company  officials 
which  give  valuable  data  on  trust  companies. 

CATOB,  GEORGE.  Trust  companies  in  the  United  States.  Bal- 
timore, 1902.  Johns  Hopkins  university.  Studies  In 
historical  and  political  science,  ser.  20,  nos.  5-6. 

Valuable  historical  and  critical  data.  Also  gives  tabular 
statement  of  reserves  required  by  law  in  the  several  states  and 
territories  in  1901,  p.  92-3. 

GILMAN,  THEODOBE.  Trust  company  reserves;  argument  sub- 
mitted to  the  committee  on  banks,  assembly  chamber, 
Albany,  New  York,  Mar.  1,  1904.  Bankers'  magazine, 
Apr.  1904.  vol.  68,  p.  518-23. 

Proposal  to  tax  impairment  of  reserves. 

HERRICK,  CLAY.  Trust  companies;  their  organization, 
growth  and  management.  Bankers'  magazine,  Jan.- 
Oct.  1904.  vols.  68-69. 

A  series  of  articles  appearing  each  month.  Gives  a  com- 
parative table  showing  reserves  required  of  trust  companies  and 
banks  in  certain  states  of  the  United  States  in  1904,  vol.  69, 
p.  440. 

KIRK  BRIDE,  F.  B.  &  STERRETT,  J.  E.  Modern  trust  company: 
its  functions  and  organization.  New  York,  1905. 

One  of  the  best  texts  on  trust  companies.  Includes  bibliog- 
raphy, p.  291-5. 


4  TRUST  COMPANY  RESERVES 

NESBITT,  ROBERT  C.  Trust  companies.  Law  society,  London. 
Proceedings  of  the  29th  provincial  meeting.  London, 

1903,  p.  234-64. 

A  description  of  the  trustee  companies  of  Australia,  Public 
trust  office  of  New  Zealand,  and  the  position  of  English  compa- 
nies or  Individuals  analogous  to  these. 

PHILLIPS,  C.  F.  The  business  in  foreign  countries  analogous 
to  that  of  trust  companies  in  the  United  States.  Amer- 
ican bankers'  association — Trust  company  section.  5th 
annual  convention,  1901. 

Published  in  Bankers'  magazine,  Nov.  1901,  vol.  63,  p. 
844-48. 

RIDGELEY,  W.  B.  Government  control  of  banks  and  trust 
companies'.  Annals  of  the  American  academy,  July, 

1904,  vol.  24,  p.  15-267. 

Discusses  briefly  the  growth  of  trust  companies  and  regu- 
lations with  reference  to  reserves. 

ROLLINS,  MONTGOMERY.  Laws  regulating  the  investment  of 
bank  funds.  Boston,  1905. 

A  convenient  compilation  of  the  laws  of  various  states  in 
the  Union  restricting  the  investment  of  funds  of  banks,  trust, 
safe  deposit  companies,  etc. 

ROSENDORFK,  RICHARD.  Treuhandgesellschaften  und  ihre 
Funktionen.  Jahrbiicher  fur  NationalOkonomie  und 
Statistik,  May,  1906,  3d  ser.  vol.  31,  p.  604-621. 

An  interesting  discussion  of  the  organization  of  trust  com- 
panies on  the  Continent. 

WHITE,  HORACE.     Trust  companies  and  the  clearing  house. 
Nation.  Feb.  12,  1903,  vol.  76,  p.  126. 
Gives  a  brief  statement  of  the  action  of  the  New  York  clear- 
Ing  house  as  to  trust  company  reserves. 

YOUNG,  G.  W.  &  COMPANY.  Digest  of  laws  relating  to  trust 
companies  of  the  United  States.  New  York,  1905. 

A  convenient  compilation  giving  contemporary  law  In  clas- 
sified form. 


KINDS  OF    DEPOSITS 


The,  changes  in  our  law  with  respect  to  trust  com- 
pany reserves  reflect  the  changes  which  have  come 
about  in  the  character  of  trust  company  deposits.  As 
the  scope  of  the  trust  company  has  broadened  from 
a  strictly  fiduciary  business  until  it  has  come  to  in- 
clude a  variety  of  activities  similar  to  those  carried  on 
by  commercial  banks,  its  deposits  have  likewise 
changed  in  character. 

Deposits  against  which  reserves  are  required  may 
be  grouped  according  to  their  general  nature  under: 

1.  fiduciary   deposits,  or  deposits  held  in   trust:   and 

2.  general  banking  deposits. 

FIDUCIARY  DEPOSITS 

The  "old  line''  trust  company  exists  for  the  purpose 
of  caring  for  the  trustee  business.  The  deposits 
which  it  receives  are  usually  not  subject  to  check  and 
it  generally  requires  prior  notice  for  the  withdrawal 
of  funds.  Many  states  require  trust  companies  to  de- 
pos't  securities  with  state  officials  as  a  guarantee  for 
the  proper  execution  of  trusts:  such  general  depos't 


6  TRUST  COMPANY  RESERVES 

being  accepted  in  lieu  of  special  bond  or  security  in 
the  case  of  each  trust. 

For  typical  laws  requiring  such  deposits  compare:  111. 
Rev.  St.  1905,  c,  32,  sec.  134-6;  Mich.  Comp.  Laws,  1897,  sec. 
6157;  Tex.  Civ.  St.  1897,  art.  642;  Wis.  Rev.  St.  1898,  sec. 
1791e. 

Certain  states  also  provide  that  trust  funds  and 
accounts  must  be  kept  separate  from  all  other  funds 
and  accounts  of  trust  companies. 

See  Ohio,  Ann.  St.  1906,  sec.  3821b  for  a  typical  provi- 
sion; also  compare  Ky.  St.  1903,  sec.  612a. 


GENERAL    BANKING.  DEPOSITS 

The  reserves  required  of  trust  companies  against 
their  general  banking  deposits  frequently  vary  with 
the  form  of  the  liability.  Certain  states  require  a 
given  percentage  of  reserve  against  all  deposits  with- 
out reference  to  their  form.  Others  require  a  re- 
serve only  against  certain  prescribed  liabilities. 

Demand  deposits 

A  majority  of  the  states1  which  require  reserves 
provide  that  the  reserve  is  to  be  held  against  demand 
deposits. 

Among  the  states  which  require  reserves  of  demand  de- 
posits only  are:  Ala.,  Id.,  La.,  Mo.,  N.  J.,  Tex.  and  W.  Va. 

Other  states  require  a  reserve  of  deposits  payable  on  de- 
mand or  within  ten  days.  See:  Me.,  Mass,  and  Ohio. 


See  laws  of  the  states  in  alphabetic  order  under  Regulations. 


TRUST  COMPANY  RESERVES          1 

Deposits  subject  to  check.  In  certain  states  trust 
companies  are  not  permitted  to  open  or  carry  current 
accounts  against  which  checks  may  be  drawn. 

An  opinion  of  the  Attorney  General  of  Wisconsin  given  in 
1905,  holds  that  funds  received  by  trust  companies  are  not 
subject  to  check. 

The  Attorney  General  of  Iowa  has  recently  given  a  sim- 
ilar opinion. 

Demand  certificates.  In  1900  the  United  States 
Circuit  Court  held  that,  in  the  absence  of  statutory 
provisions  on  the  subject,  a  trust  company  author- 
ized to  receive  money  on  deposit  has  lawful  author- 
ity to  issue  certificates  of  deposit  in  the  usual  form. 
Bank  of  Saginaw  v.  W.  Pa.  T.  etc.  Co.  105  Fed.  491. 

Time  deposits 

In  some  states1  a  reserve  of  time  deposits  is  also 
required. 

Time  certificates.  Certa-n  states  specifically  in- 
clude time  certificates  among-  the  liabilities  against 
which  a  reserve  is  required. 

For  a  typical  case  see  Cal. 

Savings  deposits.  The  percentage  required  against 
savings  deposits  is  frequently  less  than  that  against 
deposits  payable  on  demand  or  against  total  deposits. 

S.ee  the  laws  of  Utah  which  require  from  15  per  cent  to 
20  per  cent  reserve  of  demand  deposits'  as  compared  with  a 
10  per  cent  reserve  for  savings. 

See  also  the  laws  of  Kansas  which  require  a  reserve  of 
only  10  per  cent  of  time  deposits  as  compared  with  25  per 
cent  of  deposits  subject  to  check;  and  the  provisions  of 
South  Dakotai  requiring  10  per  cent  of  time  as  against 
25  per  cent  of  demand  deposits. 


8  TRUST  COMPANY  RESERVES 

Aggregate  deposits 

Quite  a  number  of  states1  require  a  given  percent- 
age of  reserve  against  all  deposits  of  trust  companies. 

For  laws  making  this  requirement  see:  Conn..  Ga.,  N.  M., 
N.  Y.,  and  Wy. 

Ratio  of  reserves  to  deposits 

Recent  legislation  shows  a  tendency  to  require  re- 
serves of  trust  companies  but  the  ratio  of  reserve  re- 
quired frequently  varies  with  the  kind  of  deposits:  in 
certain  states  the  reserve  is  based  upon  total  deposits, 
in  others  a  distinction  is  drawn  between  J:he  reserve 
required  for  time  deposits  and  those  payable  on  de- 
mand, in  still  others  reserves  are  required  of  demand 
deposits  only. 

WHAT   CONSTITUTES    BANKING 

The  laws  of  the  several  states  show  an  evident  at- 
tempt to  vary  the  amount  of  reserve  according  to  the 
powers  which  trust  companies  are  permitted  to  exer- 
cise. 

In  states  where  they  are  limited  to  strictly  fiduciary 
activities  there  is  usually  less  concern  regarding  a  re- 
serve than  in  those  states  in  which  they  are  also  per- 
m'tted  to  exercise  functions  usually  performed  by 
banks. 

Much  division  of  opinion  exists  not  only  as  to 
whether  trust  companies  are  entitled  to  do  a  banking 
business,  but  also  as  to  what  really  constitutes  bank- 
ing. The  statutes  on  this  point  vary  greatly  in  the 


TRUST  COMPANY  RESERVES          9 

different  states,  and  the  court  decisions  present  con- 
flicting conclusions.2 


2  See  State  v.  Lincoln  T.  Co.,  1898,  144  Mo.,  562;  BInghampton 
T.  Co.  v.  Clark,  1898,  32  N.  Y.,  App.  Div.,  151;  Venner  v.  Farmers' 
L.  &  T.  Co.,  1900,  54  N.  Y.,  App.  Div.,  271;  and  Bank  of  Sagi- 
naw  v.  W.  Pa.  T.  etc.  Co.,  1900,  105  Fed.,  491. 

Also  see  3  Am.  &  Eng.  Enc.  of  Law  (2d  ed.),  789-91;  5  Cyc.  of 
Law  &  Proc.  431-2 ;  and  Am.  Dig.  1905B,  col.  471. 


10  TRUST  COMPANY  RESERVE* 


REGULATIONS 


The  wide  range  of  activities  which  trust  companies 
undertake  in  the  United  States  has  made  the  question 
of  reserves  for  their  funds  of  greater  significance  in 
this  country  than  in  any  other  part  of  the  world. 

Foreign  countries 

In  England  strictly  fiduciary  business  is  still  largely 
entrusted  to  individuals,  and  that  which  is  done  by 
Banks  is  incidental  to  their  general  business.  A  few 
of  the  largest  American  trust  companies  have  estab- 
lished branches  in  London  and  in  some  other  foreign 
cities,  but  reports  from  these  branches  show  that  their 
operations  are  limited  mainly  to  the  issue  of  letters  of 
credit  and  to  the  purchase  and  sale  of  exchange  and 
of  securities  designed  for  investment. 

In  Germany3  and  Austria  the  so  called  mortgage 
banks  undertake  some  classes  of  work  commonly  done 
by  trust  companies  in  the  United  States,  but  their  fidu- 
ciary activities  are  limited.  Within  recent  years  cor- 


•  For  general  laws  applying  to  trust  companies  see  Btirgerl.     Ge- 
sete   Buch,   sec.   1189  ;   also  the  Laws  of  July   13,   and  of  Dec.  4, 

isoo. 


TRUST  COMPANY  RESERVES          H 

porations  exercising  the  usual  trust  company  func- 
tions have  sprung  up  in  Germany,  and  certain  Amer- 
ican companies  have  established  branches  which  do  an 
active  trust  company  business. 

Among  the  institutions  in  France  somewhat  anala- 
gous  to  our  trust  companies  may  be  included  the  So- 
ciete  Generate,  the  Credit  Lyonnais,  and  especially  the 
Credit  Foncier. 

In  New  Zealand4  there  has  been  a  significant  devel- 
opment in  the  establishment  of  the  Public  Trust  Of- 
fice, which  was  made  a  department  of  the  government 
in  1872.  Good  faith  in  its  administration  is  guaran- 
teed by  statute  and  the  colony  is  pledged  to  maintain 
the  integrity  of  funds  placed  within  its  care/' 

These  illustrations  of  the  business  of  trust  com- 
panies in  foreign  countr'es  indicate  that  their  most 
conspicuous  function,  apart  from  strictly  fiduciary  ac- 
tivities, is  to  handle  interest  bearing  accounts,  time 
certificates  of  deposit,  debentures,  and  other  long  time 
funds  of  the  community.  Regulations  with  reference 
to  their  funds  do  not,  therefore,  have  as  great  s'gnifi- 
cance  as  if  they  performed  the  variety  of  functions 
undertaken  by  trust  companies  in  the  United  States. 

United  States 

Alabama.  Laws,  1903,  no.  522,  sees.  5,  17.  Re- 
quires a  reserve  of  15%  of  demand  deposits,  |  of 


4  See   the  Public   Trust  Office  Consolidation   Act,   New  Zealand, 
Statutes.    1894,    Act,    No.    50 ;    also   the   amendments   of   1895.    Act, 
No.  61,  and  of  1901,  Act,  No.  55. 

5  For   a   typical   regulation   relating   to   Public  Trustees   In    Aus- 
tralia,  see  South  Australia,  Acts,   1904,  No.   854. 


12  TRUST  COMPANY   RESERVES 

which   may   consist   of   balances    due   by    banks   and 
bankers. 

Arizona.     Xo  provisions  requiring  a  reserve. 
Arkansas.     Xo  provisions  requiring  a  reserve. 

California.  Laws,  1905,  c.  296,  sec.  24.  If  a  trust 
company  does  a  banking  business,  the  general  bank- 
ing laws  apply.  Requires  a  cash  reserve  of  at  least 
20%  of  its  demand  or  immediate  liabilities  and  time 
certificates  of  deposit  in  all  places  having  a  populat  on 
of  200,000  and  over;  elsewhere  the  reserve  required 
must  be  15%.  One-half  of  such  cash  reserve  may 
consist  of  money  on  deposit,  subject  to  call,  with  any 
solvent  bank  or  trust  company.  Cash  includes  spec'e, 
national  bank  notes,  legal  tender  notes,  and  all  the 
paper  obligations  of  the  United  States  circulating  as 
money,  and  exchanges  for  clearing  house  associat'ons. 

Colorado.     Xo  provisions   requiring   a    reserve." 

Connecticut,  Gen.  St.  1902,  sec.  3400.  Requires 
a  reserve  fund  of  15%  of  its  aggregate  deposits.  Of 
this  reserve,  not  less  than  -t*T  is  to  consist  of  gold 
and  silver  coin,  the  demand  obligations  of  the  United 
States  or  national  bank  currencv,  and  is  to  be  held  bv 


•  See  Ann.  St.  Rev.  Supp.  1896,  vol.  3,  sec.  544,  providing  that 
trust  companies  may  not  transact  a  banking  business,  but  the  fact 
that  they  are  permitted  to  receive  demand  deposits  and  to  dis- 
count paper  indicates  that  the  line  between  that  which  is,  and 
that  which  is  not,  strictly  banking  business  has  not  been  closely 
drawn. 


TRUST  COMPANY  RESERVES  13 

such  baiik  or  trust  company  in  its  banking  office. 
The  remainder  may  consist  of  balances,  subject  to  de- 
mand draft  with  approved  reserve  agents,  and  of 
railroad  bonds  which  are  legal  investments  for  saving 
banks  of  the  state.  The  railroad  bonds  are  at  no  time 
to  exceed  at  par  value  i  of  the  total  reserve. 

Dclau'arc.     No  provisions  requiring  a  reserve. 

District  of  Columbia.'  No  provisions  requiring  a 
reserve. 

Florida.     No  provisions  requiring  a  reserve. 

Georgia.  Code,  1895,  sec.  1941,  Supp.  1901,  sec. 
6462.  Trust  companies  doing  a  banking  business  are 
required  to  keep  a  cash  reserve  equal  to  at  least  25% 
of  aggregate  deposits. 

Hawaii.     No  provisions  requiring  a  reserve. 

Idaho.  Laws,  1905,  p.  175.  Requires  a  reserve  in 
available  funds  of  not  less  than  15%  of  demand  liabili- 
ties but  y%  of  such  sum  may  consist  of  balances  due 
from  solvent  banks. 

Illinois.  Rev.  St.  1905,  c.  32,  sees.  129-47.  There 
is  no  provision  requiring  a  reserve,  but  it  is  the  prac- 
tice of  the  State  Auditor  to  require  state  banks,  locat- 
ed in  Chicago,  exercising  trust  company  powers  to 


Trust  companies  are  organized  under  Act  of  Cong.  Oct.  1,  1890. 


14  TRUST  COMPANY  RESERVES 

carry  a  cash  reserve  of  not  less  than  25%  of  their 
commercial  deposits.  A  less  reserve  is  required  of 
contract  or  savings  deposits.  Institutions  elsewhere 
are  required  to  maintain  a  reserve  of  15%  of  com- 
mercial deposits. 

Indiana.     No  provisions  requiring  a  reserve. 

Iowa.  Code,  1897,  sees.  1867,  1889  as  amended 
by  Laws,  1904,  c.  65.  Provides  that  trust  companies 
organized  under  the  banking  laws  may  receive  t'me 
deposits.  The  reserve  required  of  companies  thus  or- 
ganized is.  15%  of  total  deposits  in  places  having  a 
population  of  3,000  or  over,  and  10%  elsewhere;  % 
of  the  reserve  may  be  kept  on  deposit  subject  to  call 
with  other  state  or  national  banks. 

Kansas.  Gen.  St.  1905,  sec.  1528.  Requires  a  re- 
serve for  trust  companies  equal  to  25%  of  deposits 
subject  to  check  and  10%  of  timie  deposits,  in  the  same 
manner  and  subject  to  the  same  rules  as  state  banks. 
In  lieu  of  deposits  in  banks,  the  legal  reserve  may  in- 
clude United  States  bonds  and  demand  loans  secured 
by  United  States,  state,  county,  or  municipal  bonds  of 
the  cash  value  of  such  loans. 

Kentucky.  St.  1903,  sees.  584,  6i2a.  Trust  com- 
panies doing  banking  business  are  required  to  reserve 
at  least  15%  of  total  deposits  and  in  cities  of  over  50,- 
ooo  population,  at  least  25%'.  Of  this  reserve  l/, 
is  to  be  in  money  and  the  balance  in  funds  payable  on 
demand  from  other  banks. 


TRUST  COMPANY  RESERVES  15 

Louisiana.  Laws,  1902,  no.  45.  Requires  a  re- 
serve in  lawful  money  of  the  United  States  or  in  cash 
due  from  other  banks  or  bankers  equal  to  25%  of  the. 
aggregate  amount  of  its  demand  deposits,  8%  of  which 
is  to  be  kept  in  cash.  The  remainder  may  be  lawful 
money  of  the  United  States,  cash  due  from  other 
banks,  bills  of  exchange,  discounted  paper  maturing 
within  not  more  than  one  year,  bonds,  stocks,  or  se- 
curities of  the  United  States,  of  any  state  of  the 
United  States,  of  the  municipalities,  or  corporations, 
public  or  private,  thereof,  or  of  the  levee  boards  of 
Louisiana;  provided  that  deposits,  made  in  a  savings 
bank  or  in  a  savings  department  of  a  bank  also  doing 
a  general  banking  and  trust  banking  business,  which 
are  made  on  the  condition  that  they  may  not  be 
withdrawn  except  on  notice,  are  not  to  be  considered 
demand  deposits  within  the  meaning  of  this  sect'on. 

Maine.  Rev,  St.  1903,  c.  48,  sec.  80,  as  amended  by 
jLaws,  1905,  c.  15.  Requires  a  cash  reserve  equal  to 
at  least  15%  of  the  aggregate  amount  of  its  deposits 
subject  to  withdrawal  on  demand  or  w  thin  ten  days. 
In  I'.eu  O'f  such  cash  reserve  ~/:>  of  the  15%  may  con- 
sist of  balances  payable  on  demand  due  from  ap- 
proved banks  and  trust  companies  and  y^  may  con- 
sist of  bonds  of  the  United  States,  of  the  District  of 
Columbia,  and  of  certain  designated  states. 

Maryland.  Trust  companies  operate  under  char- 
ters granted  by  special  acts  of  the  Legislature  and  any 
limitations  as  to  reserves  are  to  he  found  in  the  sep- 
arate charters. 


16  TRUST  COMPANY  RESERVES 

Massachusetts.  Laws,  1904,  c.  374,  as  amendei 
by  Laws,  1905,  c,  331.  Requires  a  reserve  of  15%- 
of  the  aggregate  amount  of  deposits  which  are  sub- 
ject to  withdrawal  upon  demand  or  within  ten  days. 
.\Tot  less  than  i/^  of  such  reserve  is  to  consist  either  of 
lawful  money  of  the  United  States,  gold  certificates, 
silver  certificates,  or  notes  and  bills  issued  by  any  law- 
fully organized  national  banking  association,  and  not 
less  than  y>  of  the  remainder  of  such  reserve  may 
consist  of  balances,  .payable  on  demand1,  due  from 
approved  national  bank'ng  associations,  and  the  re- 
mainder may  consist  of  bonds  of  the  United  States 
or  of  tiie  commonwealth  computed  at  their  par 
value,  which  are  the  absolute  property  of  such 
corporation. 

Michigan.  Comp.  Laws,  1897.  sec.  6165.  Re- 
cju'res  a  reseive  of  2o%  of  matured  obligations  and 
money  due  and  payable,  ^  of  wh'ch  may  be  kept 
in  approved  banks  or  trust  companies. 

Minnesota.     No   provisions    requiring   a    reserve. 
Mississippi.     No  provisions  requirng  a  reserve. 

Missouri.  Rev.  St.  1899,  sees.  1280,  1304.  Re- 
qures  a  reserve  equal  to  at  least  \$%  of  the  aggre- 
gate amount  of  demand  deposits. 

Montana.  Civ.  Code,  1895,  sees.  584,  590-611. 
There  is  no  law  specifically  requiring  trust  companies 
to  carry  a  reserve,  but  it  is  the  practice  of  the  banking 
department  to  require  the  same  reserve  against  trust 


TRUST  COMPANY  RESERVES  17 

company  deposits  as  is  required  of  banks  of  discount. 
This  reserve  must  equal  at  least  20%  of  immediate  li- 
abilities. Of  this  amount  l/2  is  to  consist  of  balances 
due  from  solvent  banks  and  ^  is  to  be  held  in  cash 
which  may  include  specie,  legal  tender  notes,  and  all 
bills  of  solvent  banks. 

Nebraska.     No  provisions  requiring  a  reserve. 
Nezuda.     No  provisions  requiring  a  reserve. 

New  Hampshire.  No  provisions  requiring  a  re- 
serve. 

New  Jersey.8  Laws  1899,  c.  174,  sec.  20.  Re- 
quires a  reserve  of  at  least  15%  of  all  immediate  de- 
mand liabilities.  Of  this  amount  f  may  consist  of 
balances  due  from  solvent  banks  or  trust  companies 
and  i  s  to  be  held  in  cash  on  hand. 

Xctv  Mexico.  Laws,  1903,  c.  52,  sec.  10.  Re- 
quires a  reserve  of  at  least  15%  of  the  aggregate 
amount  ot  liabilities  not  including  those  liabilit'es  for 
which  bonds  of  at  least  $50,000  must  be  deposited 
with  the  Auditor  of  the  Territory.  Of  this  reserve 
\  may  consist  of  balances  due  from  approved  na- 
tional, state,  or  territorial  banks  or  trust  companies. 


8  See  N.  J.  Laws,  1899,  c.  174.  sec.  7,  forbidding  trust  companies 
to  discount  commercial  paper.  However,  sec.  10  gives  them  specific 
authority  to  purchase,  invest  in  and  sell  promissory  notes  and 
bills  of  exchange,  and  sec.  18  gives  them  authority  to  receive  de- 
posits subject  to  check.  In  reality,  therefore,  N.  .7.  permits  trust 
•companies  to  do  actual  banking  business. 


18  TRUST  COMPANY  RESERVES 

New  York.  Laws,  1906,  c.  337.  Requires  trust 
companies  having  principal  place  of  business  in  any 
city  with  «  population  of  over  800,000,  to'  keep  on 
nand  a  reserve  fund  equal  to  at  least  15%  of  aggregate 
deposits.  The  whole  of  such  reserve  fund  may,  and 
at  least  \.<>  must,  consist  of  either  lawful  money  of  the 
United  States,  gold  certificates,  silver  certificates,  or 
notes  or  bills  issued  by  any  lawfully  organized  na- 
tional banking  association ;  i/  may  consist  of  bonds, 
computed  at  their  par  value,  issued  by  the  United 
States,  New  York  state  or  those  issued  in  compliance 
with  law  by  any  city  of  the  first  or  second  class  in  the 
state;  the  balance  must  consist  of  money  on  deposit 
subject  to  call,  in  approved  banks  or  trust  companies 
in  the  state  having  a  capital  of  at  least  $200,000  or  a 
capital  and  surplus  of  $300,000. 

Trust  companies  having  principal  place  of  business 
in  cities  of  less  than  800,000,  are  required  to  keep  on 
hand  a  reserve  fund  equal  to  at  least  10%  of  aggregate 
deposits.  The  provisions  for  the  composition  of  the 
reserve  are  similar  to  those  for  the  larger  cities  except 
that  the  percentage  is  30  instead  of  331/-}- 

North  Carolina.  Each  trust  company  is  incorpor- 
ated by  special  act  of  the  Legislature  and  any  limita- 
tions as  to  reserves  are  to  be  found  in  the  separate 
charters. 

North  Dakota.     No  provisions  requiring  a  reserve. 

Ohio.  Ann.  St.  1906,  sec.  382 ib.  Requires  a  re- 
serve equal  to  15%  of  demand  deposits  or  those  pay- 
able within  ten  days.  Of  this  reserve  l/{  may  consist 


TRUST  COMPANY  RESERVES  19 

of  clearing  house  certificates  representing  specie  or 
lawful  money,  i^  must  consist  of  bonds  of  the  United 
States  or  of  Ohio,  and  the  remaining  i/£  must  be  in 
lawful 'money  of  the  United  States. 

Oklahoma.     No  provisions  requiring  a  reserve. 
Oregon.     No  provisions  requiring  a  reserve. 

Pennsylvania*  No  provision  of  law  requiring  a  re- 
serve. However,  the  Banking  Department  requires  a 
reserve  in  cash  and  amounts  due  from  banks  of  15% 
for  country  companies  and  approximately  20%  for 
city  companies. 

Rhode  Island.  Each  trust  company  is  incorporated 
by  spec'al  act  of  the  Legislature  and  any  limitations  as 
to  reserves  are  to  be  found  in  the  separate  ob.irters. 

Soutli  Carolina.  Provisions  similar  to  RJ-.or'o  Is- 
land. 

South  Dakota.  Laws,  1905,  c.  74.  Requires  a  re- 
serve of  cash  on  hand  or  on  deposit  in  solvent  banks 
equal  to  10%  of  time  deposits  and  25%  of  deposits 
payable  on  demand. 

Tennessee.     No  provisions  requiring  a  reserve. 
Texas.  .  Laws,  1905,  c.  10.     Requires  a  reserve  of 


9  See  Pa.  Dig.  of  Laws,  1903,  p.  271,  sees.  1-21,  prohibiting  trust 
companies  from  engaging  in  banking  except  as  authorized.  How- 
ever, they  are  granted  power  to  receive  demand  deposits,  and  to 
purchase  bills  of  exchange.  As  the  power  to  purchase  commercial 
paper  differs  only  in  form  from  the  power  to  discount  It,  trust 
companies  are  really  permitted  to  undertake  important  banking 
functions. 


20  TRUST  COMPANY  RESERVES 

cash  on  hand  and  cash  due  from  approved  banks  and 
trust  companies  equal  to  at  least  25%  of  the  aggregate 
amount  of  demand  deposits :  10%  of  such  reserve  is 
to  be  actual  cash. 

Utah.     Rev.  St.   1898.  sees.  378.  424.  Requires  a 

reserve  of  demand  deposits  equal  to  20%  in  cities  of 

25,000  or  over  and  15%  elsewhere:  also  provides  a 
reserve  of  10%  for  savings  deposits. 

Vermont.  There  is  no  provision  of  law  regarding 
a  reserve.1" 

Virginia.  Trust  compan'es  are  incorporate  I  by  the 
State  Corporation  Commission  and  any  limitations  as 
to  reserves  are  to  be  found  in  their  separate  charters. 

Washington.     Xo  provisions  requiring  a  reserve. 

West  Virginia.  Laws,  1901.  c.  83,  as  amended  by 
Laws,  1905,  c.  45.  Requires  a  reserve  equal  to  at 
least  15%.  of  demand  deposits.  In  lieu  of  lawful 
money,  Y<\  of  such  reserve  may  consist  of  balances 
payable  on  demand  clue  from  approved  banks. 

Wisconsin.     No  provisions  requiring  a  reserve. 

Wyoming.  Rev.  St.  1899,  sec.  3132  as  amended  by 
Laws,  1903,  c.  50.  Requires  a  reserve  of  at  least  25% 
of  liabilities  to  depositors.  Tlvs  reserve  is  to  consist 
of  cash  on  hand  or  on  deposit  subject  to  call  with 
national  or  state  banks  approved  as  reserve  agents. 


10  However,  see  Vermont  St..  1804.  sec.  4100.  providing  that  de- 
posits not  exceeding  in  the  aggregate  20£  of  a  company's  assets 
may  be  made  in  designated  hanks  or  trust  companies. 


TRUST  COMPANY  RESERVES  21 


MAINTENANCE  OF  THE   RESERVE 


PROVISIONS  REQUIRING  MAINTENANCE 

The  provisions  requir  ng  maintenance  of  a  reserve 
may  be  grouped  under:  i.  statutory  requirements;  2. 
regulations  of  state  department, — usually  the  bankr'ng 
department;  3.  limitations  in  charters  granted  by 
special  acts  of  the  Kg  slature. 

Statutory  requirements 

A  reserve  is  defin  tely  required  by  law  in  about  half 
of  our  states.11 

For  typical  provisions  compare  the  laws  of  the  following 
states:  Ala.,  Cal.,  Conn.,  Ga. ,  Id.,  Kan.,  Ky.,  La.,  Me., 
Mass.,  Mich.,  Mo.,  N.  J.,  N.  M..  N.  /.,  Ohio,  S.  D.,  Tex.. 
Ut,  W.  Va,,  Wy. 

Regulations  of  state  departments 

In  several  states  where  tlure  are  no  statutory  pro- 
visions, reserves  are  required  by  the  state  banking  de- 
partment, by  the  state:  auditor,  or  by  other  officials  en- 
trusted w'th  the  supervision  of  trust  companies. 

Compare  the  regulations  imposed  in:     111.,  Mont,  and  Pa. 


11  See  laws  of  states  in  alphabetic  order  under  Regulations. 


2-2          TRUST  COMPANY  RESERVES 

Limitations  in  charters 

In  states  where  trust  companies  are  incorporated 
only  by  special  act  of  the  legislature,  such  limitations- 
as  may  exist  with  regard  to  reserves  are  to  be  found 
in  the  separate  charters. 

For  states  illustrating  this  method  compare:  Md.,  N.  C., 
R.  I.,  and  S.  C.  Also  see  Va.  for  companies  incorporated  by 
the  State  Corporation  Commission. 

PENALTIES  i-'ou  IMPAIRMENT 

Penalties  for  failure  to  maintain  the  reserve  re- 
quired by  law  may  be  grouped  under:  i.  suspension 
of  loans  and  discounts :  2.  prohibition  of  dividends ; 
3.  tax  0-1  imDalrment  of  reserves;  and  4.  declaration 
of  insolvency. 

Suspension  of  loans  and  discounts 

One  of  the  most  common  methods  of  compelling 
maintenance  of  the  reserve  is  to  prohibit  the  making 
of  new  loans  and  discounts  until  the  reserve  has  been 
lestored  to  the  required  amount. 

The  New  York12  law  of  1906  which  is  typical  of  this 
method  provides  that  if  the  money  reserve  of  any  trust  com- 
pany is  less  than  the  amount  required  by  law  such  trust 
company  is  not  to  increase  its  liability  by  making  any  new 
loans  or  discounts  otherwise  than  by  discounting  bills  of  ex- 
change payable  on  sight  until  the  full  amount  of  its  law- 
ful money  reserve  has  been  restored.  The  superintendent  of 
banks  is  to  notify  any  trust  company  whose  lawful  reserve 
is  below  the  amount  required,  that  it  must  make  good  such 


'-  Laws,  1906,  c.  337. 


TRUST  COMPANY  RESERVES  23 

reserve,  and  if  it  fails  to  do  so  within  thirty  days  it  is  to  be 
deemed  insolvent  and  may  be  proceeded  against  as  an  in- 
solvent moneyed  corporation. 

For  similar  provisions  see:  Conn.  Gen.  St.  1902,  sec.  3400; 
Me.  Rev.  St.  1903,  c.  48,  sec.  80;  N.  J.  Laws,  1899,  c.  174,  sec. 
20;  N.  M.  Laws,  1903,  c.  52;  Ohio,  Ann.  St.  1906,  sec.  3821b; 
Tex.  Laws,  1905,  c.  10;  W.  Va.  Laws,  1901,  c.  83  as  amended 
by  Laws,  1905,  c.  45. 

Prohibition  of  dividends 

Another  common  requirement  prov  des  that  trust 
companies  shall  not  make  dividends  of  profits  until  the 
reserve  is  restored. 

For  provisions  on  this  point  see:  Conn.  Gen.  St.  1902, 
sec.  3400;  N.  M.  Laws,  1903,  c.  52;  N.  Y.  Laws,  1906,  c.  337; 
Ohio,  Ann.  St.  1906,  sec,  3821b;  W.  Va.  Laws,  1901,  c.  83  as 
amended  by  Laws,  1905,  c.  45. 

Tax  on  impairment  of  reserves 

A  tax  on  impairment  of  reserves  has  been  urged  as 
a  substitute  for  the  suspension  of  loans  and  discounts. 
Plac  ng  a  tax  on  deficiencies,  sufficiently  high  to  make 
it  unprofitable  for  a  bank  to  allow  the  impairment  to 
continue,  would,  it  is  mainta'ned,  provide  greater 
elasticity  w'th  sufficient  rigidity  for  safety.  This 
method  for  maintaining  reserves  was  recently  urged 
before  the  New  York  legislature. 1:! 

Fines  for  impairment.  Certain  states  impose  for- 
feitures or  fines  in  case  of  impa'rment  of  reserves  be- 
low the  point  required. 

Alabama.  Laws,  1903,  no.  522,  provides  for  forfeiture  in 
case  of  impairment  of  reserves  in  banks  or  trust  companies 
as  follows:  whenever  it  appears  to  the  State  Treasurer  that 


13  See  argument  by  Theodore  Oilman  submitted  to  the  Committee 
on  Banks,  Assembly  Chamber,  Albany,  N.  Y.,  Mar.  1,  1904. 


24  TRUST  COMPANY  RESERVES 

the  reserve  has  fallen  below  the  amount  prescribed,  he  is  to 
give  notification  that  it  is  to  be  made  good,  and  in  case  the 
company  fails  to  restore  the  reserve  within  thirty  days,  it  is 
to  forfeit  $25  to  the  State  for  each  day  thereafter  until  the 
reserve  is  restored. 

The  penalties  imposed  for  impairment  of  reserves,  by  the 
Montana  Civ.  Code,  1895,  sec.  584,  relate  specifically  to 
banks1,  but  it  is  the  practice  of  the  Bamdng  Department  to 
apply  the  provisions  to  trust  companies.  The  provisions  re- 
quire that  whenever  the  available  funds  on  hand  do  not 
equal  ITie  amount  provided  for  by  law  the  State  Examiner 
must  require  the  company  to  make  good  the  reserve,  and  if 
it  fails1  to  do  so  within  thirty  days  after  notice,  it  is  to  be 
deemed  guilty  of  a  misdemeanor,  and  upon  conviction  is  to- 
be  punished  by  a  fine  of  not  less  than  $100  nor  more  than 
$500. 

Declaration  of  insolvency 

The  power  to  declare  a  company  insolvent,  if  it  con- 
tinues in  its  refusal  to  restore  the  reserve,  is  usually 
vested  in  officials  connected  w'th  the  banking-  depart- 
ments in  the  several  states. 

Thus  the  Massachusetts11  law  provides  that  the  Board  of 
Commissioners  of  Savings  Banks  may  notify  any  trust  com- 
pany whose  reserve  is  below  the  amount  required  to  make 
good  such  reserve,  and  if  it  fails  to  do  so  within  sixty  days 
the  Commissioners  may  apply  to  a  Justice  of  the  Supreme 
Judicial  Court  to  appoint  one  or  more  receivers1  to  take 
possession  of  the  property  and  effects  of  the  company  and 
to  close  up  its  business,  subject  to  such  directions  as'  may 
from  time  to  time  be  prescribed  by  the  court. 

See  also:  Conn.  Gen.  St.  1902,  sec.  3400;  Ky.  St.  1903, 
sec.  616;  N.  M.  Laws,  1903,  c.  52;  N.  Y.  Laws',  1906,  c.  337. 


14  Laws.  1904,  c.  374,  sec.  7. 


J£JSffiSfi£fffl«"l  LIBRARY  FACILIT 


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